To tip or not to tip, that SHOULD BE the question

Tipped workers are more than twice as likely to be in poverty as the average worker. Yet tipping remains an accepted norm in America because people believe that tips reward hard work. Don't they? 

It turns out that tipping is only weakly correlated with good service. Michael Lynn has shown that it is more strongly associated with social norms and the appearance of the server themselves. White, 30-something, blonde, females receive the highest tips. Black people are less likely to both give and receive tips. So the likelihood of receiving a tip is more or less out of a server's hands, even though servers believe that better service is rewarded with higher tips. 

Tipping can also be confusing and uncomfortable. Tourists in America are often puzzled about how much to tip. Stories are told of patrons being chased out of restaurants by servers who were unsatisfied with their tip, claiming that they needed the money to survive. The obligation falls to the customer to pay the server enough.

Why are tips so important to the server? Because their base wage rate ($2.13 an hour, unchanged for 20 years) is set assuming that tips will be received. In theory, tipped workers should take home a minimum wage ($7.25) because employers are obliged to make up any difference between base wage plus tips and the minimum wage. In practice, the process appears complicated and reliant on employers acting promptly to pay the difference in the two, without error.

Source: Council of Economic Advisers available here.
Occupations shown are predominantly tipped.

But even the minimum wage ($7.25 an hour) is too low to meet a basic standard of living, as previous blogs have argued. So if a server wishes to earn above this level, the only way that they can do so is to earn tips to take their total wages over and above the minimum wage. But tips are irregular and never guaranteed. As a result, the median tipped wage ($10.64) is much lower than the median across all wages ($17.12) (Chart 1, left-hand diamonds). Tipping isn't working as a way to increase income. In poorer areas, where income of the clientele is itself low, tipped workers are even less likely to earn a decent amount.  

In addition, tipped jobs attract more women than men, exposing them to the irregularity of income streams that tipped work brings. Nearly three-quarters of tipped workers are women, even though they account for just under half of total employment (Chart 1, left-hand bars). Women may be attracted to these jobs because they offer flexible hours that allow them to work around childcare. But the low-paid nature of this work makes it more likely that women, particularly single mothers, will find themselves in poverty.

Given how inefficient, confusing and poverty-creating tipping can be, why not eliminate the practice altogether? Some restaurants have already instigated such a practice. Examples include increasing base salaries and making clear that tips are optional, or adding a service charge to all tables and taking the decision out of the customer's hands altogether. Bringing tipped workers onto the minimum wage would eliminate one obstacle in the path to ensuring better pay. The next would be to secure a substantial wage increase for all low-paid workers. In the meantime, customers can revert to tipping because they want to, not because they have to.  

I think, therefore I learn

Source: US Census Bureau

Minorities in the US have a much higher chance of living in poverty than Whites. This has not changed materially for 40 years (Figure 1). In other words, poverty persists.

To tackle the inequality debate head on, we need to address this racial divide, starting by shifting the mindset of minority children themselves. Children show a strong understanding of racial stereotypes from an early age. By 3, they are aware of ethnicity and gender. By 6, they begin to infer beliefs held by an individual. By 10, they are able to relate these beliefs to a more broadly-held stereotype (McKown and Weinstein, 2003). 

These stereotypes become self-fulfilling.

"Stereotype threat", as this is known, is a belief that an outcome is pre-determined by the student's background. Experiments have shown that reminding children that they are black before they sit a test reduces their subsequent score. The same is true for females and other minorities. It is no wonder then that Black and Hispanic students are more likely to drop out of high school, despite the overall improvement to completion rates (Figure 2). They think they are going to perform badly. Therefore, they do. 

Source: US Department of Commerce, Census Bureau,
Current Population Survey (CPS)

But children can be persuaded to change perceptions about themselves. This comes from a realisation that intrinsic ability is not fixed or pre-determined by their ethnic background. For example, middle-school minority students who were encouraged to believe that knowledge and intelligence are malleable - that they can be grown over time - showed an improvement in test scores (Good, Aronson and Inzlicht, 2003). First-year college students who received letters from older students about their initial struggles and the way in which they overcame them, in turn were less likely to fall behind. 

These interventions are not costly. They can be carried out within the school or college gates, by teachers or older students (as David Yeager at the University of Texas has shown). But they are exceptionally powerful. By breaking the perceived link between background and intelligence, it is more likely that minority groups will do better at school and develop the emotional and psychological tools they need to succeed in the workplace. In time, this could go a long way in breaking the inter-generational persistence of poverty.